The Czech central bank will use interventions to weaken the koruna because of its quick impact if more monetary easing is needed, the bank’s chief researcher and statistician said.
Selling the currency as a monetary-policy tool, after exhausting the room for cutting interest rates, has a number of advantages compared with other alternatives, Tomas Holub, the head of the central bank’s monetary and statistics department, wrote in an article in the Prague-based Euro magazine today.
The Czech economy shrank for a fourth consecutive quarter between July and September, matching the longest decline on record as the government’s budget-deficit cuts constrained household spending. Weakening domestic demand is taming inflation, which pushed the central bank in Prague to cut rates to effectively zero and prompted talk of weakening the currency should the economy require more policy easing.
“The main advantage is the proven and quick reaction of the economy to depreciation of the koruna exchange rate,” Holub said in the article posted on the bank’s website. While changes in the “standard instrument, the interest rates,” translate into the economy in 12 to 18 months, the transmission of exchange-rate changes happens within a year, Holub said.
The Ceska Narodni Banka reduced the main two-week repurchase rate to a record-low 0.05 percent on Nov. 1, almost three-quarters of a point less than the euro-area benchmark. Most Czech central bankers agree the main interest rate should be kept at effectively zero until inflation risks rise significantly, according to minutes from their last rate meeting.
The koruna traded at 25.258 against the euro at 1:24 p.m. in Prague, 0.03 percent weaker from the previous session.
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